CHAPTER 12 Pricing
MULTIPLE CHOICE
1) Which of the following conditions must be true so that a firm can price discriminate?
A) There are no other firms in the market.
B) The good is a non-durable.
C) The good cannot be easily resold.
D) All of the above.
Answer: C
Diff: 1
Topic: Why and How Firms Price Discriminate
2) At many municipal golf courses, local residents pay a lower fee to play than other golfers do.
One necessary condition for the golf course to be able to successfully price discriminate
according to residency is that
A) they can check the identification cards of golfers.
B) local resident golfers and other golfers have the same price elasticity of demand to play at
the municipal course.
C) there are many golf courses nearby from which golfers can choose.
D) they require all golfers to rent a cart.
Answer: A
Diff: 1
Topic: Why and How Firms Price Discriminate
3) If consumers are identical, then
A) price discrimination is impossible.
B) price discrimination can occur if each consumer has a downward-sloping demand curve
for the product.
C) perfect price discrimination is the only form of price discrimination that can increase a
monopoly's profit.
D) tie-in sales cannot increase a monopoly's profit.
Answer: B
Diff: 1
Topic: Why and How Firms Price Discriminate
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4) A perfect price discriminator
A) charges each buyer her reservation price.
B) charges different prices to each customer based upon different costs of delivery.
C) generates a deadweight loss to society.
D) charges lower prices to customers who buy greater quantities.
Answer: A
Diff: 1
Topic: Perfect Price Discrimination
5) A perfect-price-discriminating monopoly's marginal revenue curve
A) lies below the demand curve.
B) is the demand curve.
C) varies for each consumer.
D) is the same as the monopolist's marginal revenue curve.
Answer: B
Diff: 1
Topic: Perfect Price Discrimination
6) Which of the following sellers is most able to perfectly price discriminate?
A) a college or university
B) the post office
C) a clothing store
D) a grocery supermarket
Answer: A
Diff: 1
Topic: Perfect Price Discrimination
7) The deadweight loss generated by a perfect-price-discriminating monopoly
A) equals the deadweight loss of a single-price monopoly.
B) is greater than the deadweight loss of a single-price monopoly.
C) equals zero.
D) equals the sum of all lost consumer surplus.
Answer: C
Diff: 1
Topic: Perfect Price Discrimination
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8) If a market is controlled by a perfect-price-discriminating monopoly, then
A) a deadweight loss is generated.
B) there is no consumer surplus.
C) consumer surplus is the same as under perfect competition.
D) output is less than that of a single-price monopoly.
Answer: B
Diff: 1
Topic: Perfect Price Discrimination
Figure 12.1
9) Figure 12.1 shows the market for a particular good. If the market is controlled by a perfect-
price-discriminating monopoly, consumer surplus equals
A) A.
B) A + B + C.
C) C.
D) zero.
Answer: D
Diff: 1
Topic: Perfect Price Discrimination
10) Figure 12.1 shows the market for a particular good. If the market is controlled by a perfect-
price-discriminating monopoly, social welfare equals
A) A.
B) A + B + C.
C) A + B + C + D + E.
D) zero.
Answer: C
Diff: 1
Topic: Perfect Price Discrimination
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11) Figure 12.1 shows the market for a particular good. If the market is controlled by a perfect-
price-discriminating monopoly, producer surplus equals
A) A + B + C + D + E.
B) D + E.
C) E.
D) zero.
Answer: A
Diff: 1
Topic: Perfect Price Discrimination
12) Figure 12.1 shows the market for a particular good. If the market is controlled by a perfect-
price-discriminating monopoly, the deadweight loss equals
A) C + E.
B) A + B + C.
C) C.
D) zero.
Answer: D
Diff: 1
Topic: Perfect Price Discrimination
13) A monopoly will not be able to perfectly price discriminate if
A) obtaining information about each buyer's reservation price is too costly.
B) demand is very elastic.
C) demand is very inelastic.
D) resale is impossible.
Answer: A
Diff: 1
Topic: Perfect Price Discrimination
14) A monopoly will not be able to perfectly price discriminate if
A) each consumer does not reveal her reservation price.
B) demand is very elastic.
C) the firm's marginal cost curve is upward sloping.
D) All of the above.
Answer: A
Diff: 1
Topic: Perfect Price Discrimination
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15) If a monopoly charges higher prices to consumers who buy smaller quantities than to
consumers who buy larger quantities, then
A) consumer surplus is larger than under single-price monopoly.
B) social welfare is larger than under perfect competition.
C) the monopoly's profits are larger than under single-price monopoly.
D) the monopoly's profits are larger than under perfect price discrimination.
Answer: C
Diff: 2
Topic: Quantity Discrimination
16) Quantity discrimination makes sense if
A) buyers of smaller quantities are more price sensitive than buyers of larger quantities.
B) buyers of smaller quantities are less price sensitive than buyers of larger quantities.
C) demand for the good is perfectly elastic.
D) the lower price for larger quantities encourages all consumers to purchase the larger
quantity.
Answer: B
Diff: 2
Topic: Quantity Discrimination
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Figure 12.2
17) Bob is the only carpet installer in a small isolated town. Figure 12.2 shows the demand
curves of two distinct groups of customers—residential and business. If the marginal cost of
installing carpet is $1 per sq yard, what price does Bob charge each segment?
A) $1 in each market
B) $5.50 in the residential market and $8 in the business market
C) $1 in the residential market and $5 in the business market
D) $10 in the residential market and $15 in the business market
Answer: B
Diff: 0
Topic: Multimarket Price Discrimination
18) Bob is the only carpet installer in a small isolated town. Figure 12.2 shows the demand
curves of two distinct groups of customers - residential and business. Bob is likely to price
discriminate because
A) elasticities differ across markets.
B) the installation of carpets cannot be resold.
C) Bob can probably identify which consumers belong to which segment.
D) All of the above.
Answer: D
Diff: 0
Topic: Multimarket Price Discrimination
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19) If two identifiable markets differ with respect to their price elasticity of demand and resale is
impossible, a firm with market power will
A) set a higher price in the market that is more price elastic.
B) set a lower price in the market that is more price elastic.
C) set price so as to equate the elasticity of demand across markets.
D) set price equal to marginal cost in both markets.
Answer: B
Diff: 1
Topic: Multimarket Price Discrimination
20) A multimarket price discriminator sells its product in Florida for three times the price it sets
in New York. Assuming the firm faces the same constant marginal cost in each market and
the price elasticity of demand in New York is -2.0, the demand in Florida
A) has an elasticity of -6.0.
B) is more price elastic than the demand in New York.
C) has an elasticity of -1.2.
D) has an elasticity of -0.67.
Answer: C
Diff: 2
Topic: Multimarket Price Discrimination
21) Suppose multimarket price discrimination is possible; however, a firm sets the same price in
each market. As a result,
A) price elasticity of demand is the same in each market.
B) the price-inelastic market will buy zero units.
C) marginal revenue in the price-elastic market exceeds marginal revenue in the pric-inelastic
market.
D) the deadweight loss is less than if the firm price discriminated.
Answer: C
Diff: 2
Topic: Multimarket Price Discrimination
22) If the demand for air travel were to change so that business travelers and vacationers have the
same price elasticity of demand for air travel,
A) airlines would charge the same price to each type of flyer.
B) airlines would still charge business flyers a higher fare since the traveler's employer pays
anyway.
C) airlines would be driven out of business.
D) airlines would counter by charging vacationers a higher fare.
Answer: A
Diff: 1
Topic: Multimarket Price Discrimination
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23) If somebody posing as a vacationer were able to purchase large numbers of airline tickets
from the airlines and later resell them to business travelers,
A) multimarket price discrimination on the part of airlines would no longer be profitable.
B) multimarket price discrimination on the part of airlines would no longer be profit
maximizing.
C) the airlines would respond by raising further the price charged to business flyers.
D) this person would not earn any economic profit.
Answer: B
Diff: 1
Topic: Multimarket Price Discrimination
24) Relative to a single-price monopoly, the effect of multimarket price discrimination on social
welfare is
A) beneficial.
B) detrimental.
C) neutral.
D) ambiguous.
Answer: D
Diff: 1
Topic: Multimarket Price Discrimination
25) Coupons represent a form of price discrimination because they offer a low-cost way for firms
to
A) identify customers with apparently more elastic demand and offer them a lower price.
B) retain loyal customers who are not price sensitive.
C) offer discounts to consumers who buy larger quantities.
D) perfectly price discriminate.
Answer: A
Diff: 1
Topic: Multimarket Price Discrimination
26) Airlines offer lower prices to vacationers than to business travelers because
A) of government regulations requiring them to do so.
B) business travelers do not care at all about costs.
C) business travelers are less flexible in their travel plans than vacationers are.
D) airlines know that business travelers enjoy flying more than vacationers do.
Answer: C
Diff: 1
Topic: Multimarket Price Discrimination
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27) Suppose a profit-maximizing monopoly is able to employ multimarket price discrimination.
The marginal cost of providing the good is the same in both markets. The marginal revenue
the firm earns on the last unit sold in the market with the higher price will be
A) greater than the marginal revenue the firm earns on the last unit sold in the market with
the higher price.
B) less than the marginal revenue the firm earns on the last unit sold in the market with the
higher price.
C) equal to the marginal revenue the firm earns on the last unit sold in the market with the
higher price.
D) greater than the marginal cost of the last unit.
Answer: C
Diff: 1
Topic: Multimarket Price Discrimination
28) Two-part tariffs offer a mechanism whereby the firm can
A) charge two different prices to distinct groups of customers.
B) collect two times as much from consumers as a single-price monopoly can.
C) capture some or all of the consumer surplus.
D) reduce some of its fixed costs.
Answer: C
Diff: 1
Topic: Two-part tariffs
29) Suppose all individuals are identical, and their monthly demand for Internet access from a
certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour
and q is hours per month. The firm faces a constant marginal cost of $1. Potential consumer
surplus equals
A) $4.
B) $8.
C) $16.
D) $32.
Answer: C
Diff: 1
Topic: Two-part tariffs
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30) Suppose all individuals are identical, and their monthly demand for Internet access from a
certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour
and q is hours per month. The firm faces a constant marginal cost of $1. The profit-
maximizing two-part tariff yields total revenue of
A) $24.
B) $40.
C) $16.
D) $32.
Answer: A
Diff: 1
Topic: Two-part tariffs
31) Suppose all individuals are identical, and their monthly demand for Internet access from a
certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour
and q is hours per month. The firm faces a constant marginal cost of $1. The profit
maximizing two-part tariff yields results in the firm selling
A) 4.5 hours.
B) 10 hours.
C) 5 hours.
D) 8 hours.
Answer: D
Diff: 1
Topic: Two-part tariffs
32) Suppose all individuals are identical, and their monthly demand for Internet access from a
certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour
and q is hours per month. The firm faces a constant marginal cost of $1. If the firm will
charge a monthly access fee plus a per hour rate, the monthly access fee will equal
A) $1.
B) $5.
C) $8.
D) $16.
Answer: D
Diff: 2
Topic: Two-part tariffs
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33) The sales of shoes that include shoelaces is a tie-in sale that most likely
A) greatly increases the shoe producer's profit.
B) increases transactions costs.
C) increases efficiency.
D) None of the above.
Answer: C
Diff: 1
Topic: Tie-in Sales
34) Tie-in sales are most advantageous to the seller when
A) the demands for the two goods are negatively correlated.
B) the demands for the two goods are positively correlated.
C) the demands for the two goods are unrelated.
D) there are economies of scope.
Answer: A
Diff: 1
Topic: Tie-in sales
TRUE/FALSE/EXPLAIN
1) Assuming identical products, the Bertrand model predicts that firms will always set price
equal to marginal cost.
Answer: True. Given that the products are identical, firms gain by undercutting rivals if rivals
price above marginal cost.
Diff: 1
Topic: Price Setting
2) If two markets have the same price elasticity of demand at every price, a monopoly will not
practice multimarket price discrimination.
Answer: True. If both markets have the same price elasticity of demand, there is nothing to
be gained by price discrimination.
Diff: 1
Topic: Why and How Firms Price Discriminate
3) A perfect-price-discriminating monopoly maximizes social welfare as measured by the sum
of producer surplus plus consumer surplus.
Answer: True. Unlike the competitive market, however, social welfare is all producer
surplus. There is no consumer surplus. Thus, while a perfect-price-discriminating monopoly
is efficient, many are troubled by it based upon distributional issues.
Diff: 1
Topic: Perfect Price Discrimination
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4) A firm that practices multimarket price discrimination will set the lower price in the market
that has the most elastic demand.
Answer: True. The firm will equate marginal revenue across markets. Since MR = p(1 +
1/elasticity), markets with greater elasticity require lower prices.
Diff: 1
Topic: Multimarket Price Discrimination
5) Two-part tariffs allow the monopoly firm to capture all of the potential consumer surplus
generated by the sale of its product.
Answer: False. This is only the case if all consumers are identical. If consumers differ, no
single tariff can capture all the consumer surplus.
Diff: 1
Topic: Two-part tariffs
PROBLEMS
1) Explain why a firm can earn more profit by price discrimination than from
setting a uniform price.
Answer: First, price discrimination allows a firm to charge a higher price to customers who
are willing to pay more than the uniform price. The firm captures more of the consumer
surplus. Second, a price-discriminating firm can sell to additional customers who were
unwilling to pay the uniform price.
Diff:1
Topic: Why and How Firms Price Discriminate
2) Suppose two countries, A and B, are at war with each other. Country A is very wealthy;
country B is very poor. The XYZ Co. produces tanks. Is XYZ able to set a different price for
the tank sold to country A than the price for the tank sold to country B? Explain.
Answer: XYZ can practice multimarket price discrimination. There are two identifiable
segments with different elasticities. Since the two countries are at war, resale is doubtful.
Diff: 1
Topic: Why and How Firms Price Discriminate
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Figure 12.1
3) Figure 12.1 shows the market for a given product. Defining welfare as consumer surplus plus
producer surplus, calculate the social welfare associated with perfect competition, single-
price monopoly, and a perfect-price-discriminating monopoly. Which market structure(s)
maximize social welfare?
Answer: Social welfare equals
Perfect competition: A + B+ C+ D + E
Single-price monopoly: A + B + D
Perfect-price-discriminating monopoly: A + B + C + D + E
Social welfare is greatest under either perfect competition or perfect price discrimination.
Diff: 1
Topic: Perfect Price Discrimination
4) A hotel with market power charges customers who check in before 5:00pm more
than those who check in after 5:00pm. Those who check in early are much more likely to use
the hotel's pool. Explain why this price difference may not be price discrimination.
Answer: The marginal cost of providing a hotel stay to those who check in early may be
greater than the marginal cost of providing a stay to those who check in after 5:00pm. Those
who check in early are more likely to use more towels, soap, shampoo, bathing caps, etc.,
than those who arrive after 5:00pm. The difference in costs may explain the hotel price
differences.
Diff: 1
Topic: Multimarket Price Discrimination
5) An electric utility is going to use a block-pricing schedule. They plan to charge P1
for the first Q1 units and P2 for the subsequent units. The units sold at P2 are the total units
sold, Q2, minus the total units sold at P1. The inverse demand curve is P = $100-Q, and the
marginal and average cost is $40. Use calculus to solve for P1, P2, Q1, Q2.
Answer: The profit equation for this utility is π = P1(Q1) * Q1 + P2(Q2)*(Q2 - Q1) - 40Q2.
The derivative of profit with respect to Q1 is 100 - 2*Q1 - 100 +Q2. The derivative of profit
with respect to Q2 is 100 - 2*Q2 +Q1 - 40. By setting these two derivatives equal to zero and
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substituting, Q1 equals 20 and Q2 equals 40. Substituting the quantities into the inverse
demand curve, P1 equals $80 and P2 equals $60.
Diff: 2
Topic: Quantity Discrimination
Figure 12.2
6) Bob is the only carpet installer in a small isolated town. Figure 12.2 shows the demand
curves of two distinct groups of customers—residential and business. If the marginal cost of
installing carpet is $1 per sq yard, what price does Bob charge each segment?
Answer: Setting MR = 1 in both markets yields a price of $5.50 in the residential market and
$8 in the business market.
Diff: 1
Topic: Multimarket Price Discrimination
7) A specialized rice grower sells rice in two markets, the United States and Japan, and the
marginal cost is the same in both markets. The price elasticity of demand in the United States
is -2.0, and the price elasticity of demand in Japan is -1.5. If the grower practices multimarket
price discrimination, which country's consumers will pay a higher price and by how much?
Answer: pus( 1 + 1/-2) = pj( 1 + 1/-1.5). Rearranging yields pus = (2/3) pj. The price in the
United States will be 2/3 the price in Japan.
Diff: 2
Topic: Multimarket Price Discrimination
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8) A weapons producer sells guns to two countries that are at war with each other. The guns can
be produced at a constant marginal cost of $10. The demand for guns from the two countries
can be represented as:
QA= 100 - 2p QB= 80 - 4p
Why is the weapons producer able to price discriminate?
What price will it charge to each country?
Answer: The firm can price discriminate. There are two identifiable segments with different
elasticities. Since the two countries are at war, resale is doubtful. To solve, find marginal
revenue for each and set equal to marginal cost of $10.
MRB= 20 - (1/2)QB = 10 or QB= 20 and pB= 15.
MRA= 50 - QA = 10 or QA= 40 and pA= 30.
Diff: 2
Topic: Multimarket Price Discrimination
9) If a firm sells to two distinct identifiable markets and resale is impossible, why is price
discrimination more profitable than setting a single price?
Answer: If the firm charges a single price on the two different markets, marginal revenue in
one market will exceed marginal revenue in the other. Without changing output level the firm
could raise its profit as follows. The firm could sell one less unit in the low MR market and
sell that unit in the higher MR market. As long as MR's differ, the firm can increase profit by
changing sales in this direction. As this happens price is increasing in the market where sales
are falling and price is falling in the market where sales are increasing.
Diff: 2
Topic: Multimarket Price Discrimination
10) Each identical consumer has the following demand for golf, q = 100 - p, where q is the
number of rounds of golf played per year and p is the price per round. The only golf course in
an isolated town incurs a marginal cost of $10 per round of golf. It wishes to charge a
membership fee and a fee per round of golf. What price will it set for each fee?
Answer: At a price of $10, consumer surplus is $4,050. The firm maximizes profit by setting
the annual fee equal to $4,050 and charging a $10 per round fee.
Diff: 1
Topic: Two-part tariffs
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11) Explain why a monopoly that knows the demand curve of identical consumers
can set a two-part tariff with the lump sum tariff equal to the total amount of potential
consumer surplus.
Answer: The producer wants to set the lump sum tariff equal to the competitive level of
consumer surplus. This maximizes the producer surplus. The consumer surplus measures the
difference between the consumer's value of the good and the price paid for each unit. Thus,
the consumers are willing to pay up to the total amount of consumer surplus.
Diff: 2
Topic: Two-part Tariff
12) Suppose a monopoly produces film and cameras. Consumers demand pictures, which require
film and one camera. Two different types of consumers have the following demand for film,
qA= 100 - 10p and qB= 80 - 10p. The monopoly cannot price discriminate in the market for
film or the market for cameras, but it can bundle the products. The monopoly produces film
at a constant marginal cost of $1 per roll. What price will the monopoly set for film and for
cameras?
Answer: Profit equals [(8 - p) * (80 - 10p)] + (p - 1)(180 - 20p). Maximizing profit subject to
p yields 20p - 160 + 180 -40p + 20 = 0 or 20p = 40 or p = $2. At that price, the firm charges
(1/2)(8 - p)(80 - 10p) = $180 for a camera.
Diff: 2
Topic: Two-part tariffs
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